Thursday, October 21, 2010

Last week, cattle feeders held out for higher money and, rather unexpectedly, got it on a relatively light volume of cattle. The futures market was apparently caught a little off guard by the roughly $1.50 higher cash cattle prices, and nearby Live Cattle futures raced to catch up, adding over $2 in Friday’s trading. Higher fed cattle prices were supported by stronger wholesale beef prices. The Choice cutout added almost $2 over the course of last week, ending up at $154.68 on Friday.

Feeder cattle futures also gained back some ground on Friday as the corn market took a breather from its recent rally. Cash calf markets were hit pretty hard last week, though, with prices (especially on stocker cattle) dropping in response to the prior week’s corn market shock. At Oklahoma City, feeders were called $2 to $3 lower while stockers were called $5 to $8 lower.

Thursday, October 14, 2010

December 2010 corn futures traded to a high of $5.235 on September 27 and closed at $5.05 on Sept. 29. On Oct. 4, the surprisingly large USDA Sept. 1 corn stocks estimate released on Sept. 30 sent that contract to a low of $4.56, said University of Illinois agricultural economist Darrel Good.

Similarly, the November 2010 soybean futures contract traded to $11.295 on Sept. 27, closed at $10.99 on Sept. 29, and declined to $10.44 on Oct. 4, he said.

"Price declines came to a halt with the release of USDA's October Crop Production report on Oct. 8. That report contained a unexpectedly small forecast of the size of the U.S. corn and soybean crops," he said.

The corn crop is now forecast at 12.664 billion bushels, 496 million smaller than the September forecast and 446 million smaller than the 2009 harvest. Although the estimate of harvested acreage was increased by 258,000 acres, the forecast yield was lowered by 6.7 bushels, to 155.8 bushels, he said.

"The decline from the September forecast was record large, eclipsing the 4.3 bushels of 1974 and the 4.5 bushels of 1995. Yield forecasts declined by 14 bushels in Illinois, 10 bushels in Indiana and Iowa, and 9 bushels in Missouri and Nebraska. The December 2010 futures contract traded to a high of $5.73 on October 11," he said.

The 2010 soybean crop is now forecast at 3.408 billion bushels, 75 million smaller than the September forecast, but 49 million larger than the 2009 crop.

"The lower forecast this month reflected a reduction of 1.163 million bushels in the estimate of harvested acreage and a 0.3 bushel reduction in the yield forecast. At 44.4 bushels, the 2010 average U.S. yield is still expected to be record large. The November 2010 soybean futures contract traded to a high of $11.89 on Oct. 11."

In a separate report, the USDA lowered the estimate of feed and residual use of corn during the 2009-10 marketing year as a result of the larger than expected Sept. 1 stocks estimate of Sept. 30.

"For the current year, the forecast of corn exports was reduced by 100 million bushels, reflecting the anticipated impact of higher prices and increased competition from Argentina. Some had expected an increase in the forecast of Chinese imports of U.S. corn, but no changes were made in the projected corn balance sheet for China. The forecast size of the 2011 Argentine harvest was increased by 157 million bushels."

The forecast of feed and residual use was increased by 150 million bushels, to a total of 5.4 billion bushels.

"The USDA argued that apparent use during the first quarter of the year will be boosted by the early harvest that resulted in consumption of new crop corn before Sept. 1, but the argument is not entirely convincing. The combined estimates of feed and residual use of corn for the 2009-10 and 2010-11 marketing years appear too large.

"Use during the first quarter will not be revealed until the Dec. 1 stocks estimate is released in early January. Some indication of feed use will be revealed in the monthly cattle on feed reports and the weekly reports of egg sets."

Stocks of corn at the end of the 2010-11 marketing year are forecast at a 14-year low of 902 million bushels, or 6.7 percent of projected consumption, he noted.

"We consider a 5 percent stocks-to-use ratio, as experienced in 1995-96, to be a minimum carryover level. The USDA expects the 2010-11 marketing year average farm price to be in a range of $4.60 to $5.40, well above the previous record of $4.20 during the 2007-08 marketing year.".

For soybeans, the forecast of the size of the domestic crush during the current year was increased by 15 million bushels and the forecast of exports was increased by 35 million bushels.

"At 1.52 billion bushels, exports are expected to be 22 million bushels larger than in the previous year. While the USDA increased the projected size of the 2011 Brazilian harvest by 73 million bushels, South American production is still expected to be 276 million bushels smaller than the record harvest of 2010.

"In addition, China is expected to import 2.02 billion bushels of soybeans from all sources during the current marketing year, up from 1.855 billion last year."

Stocks of U.S. soybeans at the end of the 2010-11 marketing year are projected at 265 million bushels. That is a comfortable level of stocks, but it is 85 million less than last month's projection. The 2010-11 marketing year average farm price is projected in a range of $10 to $11.50 so the record of $10.10 during the 2007-08 marketing year may be exceeded.

"Corn and soybean prices will now be influenced by expectations about the November production forecasts and the revealed rate of consumption. Chatter about acreageneeds in 2011 has already begun, but it is likely premature."

The actual rate of consumption over the next six months and the size of the South American crops will have significant impacts on U.S. acreage needs in 2011. Early thinking is that more corn acres will be needed in 2011. The degree of acreage competition for spring planted crops will be influenced by winter wheat seeding decisions to be revealed in early January.

Monday, October 11, 2010

In the October 8 2010 Crop Production and World Agricultural Supply-Demand Estimate (WASDE) reports, the USDA made changes in its supply-demand projections that have strong positive impacts on U.S. and World feedgrain price prospects, as well as positive direct and cross-crop market effects on soybean and wheat price prospects.

Market Implications for U.S. Corn and Grain Sorghum: Projections for MY 2010-11 of U.S. corn ending stocks below 1 billion bushels (902 mb) and % stocks-to-use of 6.7% (nearing historic lows of 5% in MY 1995-96) provide strong supply-demand support U.S. corn and grain sorghum prices for the remainder of 2010 and into 2011. With improved U.S. cash corn price projections for MY 2010-11 inthe $4.60 to $5.40 /bu range, it is likely that price rationing will have some impact on feedgrain use.

MY 2010-11 appears to be a “short crop” marketing year for U.S. corn and other feedgrains. If a typical short crop corn price pattern emerges in MY 2010-11, then strong prices in late fall 2010 may be matched or exceeded in the spring 2011 due to uncertainty about U.S. feedgrain and oilseed acreage (i.e., “bidding for acres) and weather-driven crop production prospect concerns.

Market Implications for U.S. Wheat: World wheat ending stocks for MY 2010-11 are projected to decline to 175 mmt (26.3% S/U), down from 197 mmt (30.2% S/U) in MY 2009-10. However, MY 2010-11 ending stocks are still projected to be 50 mmt above MY 2007-08 when they declined to a 30 year record low of 124 mmt (˜ 20% S/U). Even though World wheat stocks in MY 2010-11 are not projected to be as tight as in MY 2007-08, wheat prices have been supported by the market impact of a) export limits from Black Sea countries, b) the possibility of production problems in some major wheat exporters, c) continued steady growth in World wheat usage, and d) the current availability of sizable U.S. wheat stocks to help meet World export demand. Unless World wheat production markedly expands to meet or surpass wheat usage in the next 1-2 years or longer, ending stocks will likely be relatively tight, supporting U.S. wheat prices at historically high levels.

Market Implications for U.S. Soybeans: Current USDA WASDE soybean market projections for MY 2010-11 World supplies, domestic demand, exports, and ending stocks appear likely to support historically high U.S. price levels (i.e., $10.00 to $11.50 /bu for MY 2010-11). However, any appreciable threat to World soybean supply and/or demand factors could be expected to spark extreme price volatility in soybean markets. In particular, world soybean markets will be vulnerable to soybean production problems in either the U.S. or South America, or to any weakness in world soybean export demand, particularly from China given its dominant role in world soybean and soybean product markets.

With strong prices forecast for both corn and soybeans for MY 2010-11, it is likely that a strong competition for U.S. crop acres will occur in the spring of 2011, with new crop NOV 2011 soybean and DEC 2011 corn futures reflecting market concerns about 2011 acreage and production prospects.

Tuesday, October 5, 2010

The USDA's September Grain Stocks report indicates that the corn that went missing in June was found in September. The USDA's June 1, 2010 corn stocks estimate released on June 30 showed a surprisingly small inventory of corn. That estimate helped ignite a three-month rally in corn prices, says University of Illinois agricultural economist Darrel Good.

"At the time of its release, the June corn inventory estimate created a lot of discussion about what happened to the 250 million bushels of corn that had gone missing. The small stocks estimate resulted in a very large estimate of feed and residual use of corn during the third quarter (March - May 2010) of the 2009 -10 marketing year."

That large estimate resulted in the USDA increasing the projection of feed and residual use for the entire marketing year by 175 million bushels, to a total of 5.525 billion bushels. And that projection appeared to be unrealistically large but was maintained in the balance sheet through September due to the lack of survey data to confirm or refute the projection.

The projection of large feed and residual use resulted in a projection of 2009-10 marketing year ending stocks of 1.386 billion bushels. Such a small projection underscored the need for a large 2010 crop and provided support for prices during September as expectations about the size of the 2010 crop were reduced.

"On September 30, the USDA released the estimate of September 1 corn stocks. That estimate of 1.708 billion bushels exceeded the USDA's earlier projection by 322 million bushels and was regarded as bearish even though the market was anticipating stocks to be larger than had been projected."

"Some observers tried to explain the large stocks estimate by speculating that some of the newly harvested crop was included in the estimate of 'old crop' inventories."

However, the USDA explicitly asked survey respondents to include only stocks of corn harvested before 2010 in their estimates. To the extent that respondents mistakenly included 2010 crop in their estimates, the misreporting should not have been a larger issue than in the past. Corn harvest progress was minimal on September 1 and was only marginally higher than the average pace at the end of the survey period.

The September 1 stocks estimate implies a very small feed and residual disappearance of corn in the final quarter of the marketing year. The small estimate for the quarter, however, offsets the large estimate for the third quarter, resulting in areasonable estimate of about 5.2 billion bushels for the 2009-10 marketing year.

That magnitude of disappearance is about equal to both the disappearance in the 2008-09 marketing year and the projection of use during the current marketing year.

"The large estimate of September 1 stocks has important implications for the balance sheet for the 2010-11 marketing year. Without changes in the forecast size of the 2010 crop or changes in projected use during the year, the projection of ending stocks would be increased by 322 million bushels, to a total of 1.438 billion bushels."

To maintain the projection of year-ending stocks at 1.116 billion bushels, some combination of a lower production forecast or a larger consumption forecast totaling 322 million bushels will have to occur.

"If all of the change came in crop size, without a change in the estimate of harvested acreage, the U.S. average yield forecast would have to be lowered from the current 162.5 bushels to 158.5 bushels."

Prior to the release of the September stocks estimate, there was some expectation that the yield forecast would be lowered enough to require corn consumption to be less than projected. Such rationing of consumption would likely have required even higher prices.

"The September stocks estimate reduces the likelihood of such a rationing scenario, tends to lower price expectations, and increases the chances that prices have peaked.

"There is still some expectation that the USDA will lower the 2010 average yield forecast next week, but there is uncertainty about the acreage estimate and the resulting production forecast."

Following the release of the September stocks estimate, corn prices declined to the early September lows, suggesting there is less concern about corn supplies and an understanding that the September stocks estimate did not include new crop inventories. The USDA confirmed that inclusion of such stocks is very unlikely.

The USDA's new production forecast and updated forecast of marketing year consumption to be released in separate reports on October 8 will provide a clearer picture of whether supplies are adequate or rationing will be required.